What type of International Trade Finance interview questions should you expect in campus placement interviews? Well, most of these questions test your understanding of the products and services offered in international trade.
The market for such roles is still small and can get extremely competitive. This is why recruiters need candidates with practical knowledge and prefer those who are able to answer such technical trade finance interview questions.
Q.1. What is the UCP 600 regulation?
The UCP 600 is an abbreviation for “Uniform Customs & Practice for Documentary Credits”. It is a set of rules and regulations issued by the International Chamber of Commerce (ICC). It consists of a set of 39 articles that govern the operations of Letters of Credit. These regulations apply to 175 countries around the world.
The objectives of these rules are to standardize international trade, reduce risks of trading goods and services, and govern trade. UCP 600 is the sixth and latest revision of the UCP which came into effect on 1st July 2007. It is the outcome of more than three years of work by the ICC’s Commission on Banking Technique and Practice.
Q.2. What is the difference between a Bill of Exchange and a Draft?
There is no difference between a bill of exchange and a draft.
A bill of exchange transaction can involve up to three parties. The drawee is the party that pays the sum specified by the bill of exchange. The payee is the one who receives that sum. The drawer is the party that gets the sum from the payee.
Bills of exchange issued by banks are referred to as drafts or bank drafts. In case they are issued by individuals, they are called trade drafts.
If the funds are to be paid immediately or on-demand, the bill of exchange is known as a sight bill or a demand draft. But, if the funds are to be paid at a set date in the future, it is known as a term bill or a time draft.
*This is one of the tricky trade finance interview questions that test how thorough a candidate is with all the terminology.
Q.3. What is channel financing?
Channel financing is a structured program through which the bank offers short-term working capital facilities to the supply chain stakeholders i.e. both the buyer and the supplier.
Channel financing helps the stakeholders to sustain a seamless business flow by avoiding any difficulties relating to working capital which are mainly delays in getting the payment from the buyer to the supplier.
Products under channel financing typically include overdraft or cash credit facilities or bill discounting.
Q.4. What is the difference between Factoring and Forfaiting?
Q.5. What are the different types of BGs?
There are different types of bank guarantees and each is used for a specific type of transaction:
- Performance Guarantee–This is usually invoked if the buyer incurs the cost and the seller does not deliver the goods and services as promised in the contract.
- Bid Bond Guarantee-This is typically used in tenders to ensure that the winning bidder undertakes the contract as per the terms of their winning bid.
- Financial Guarantee–In this, a bank takes responsibility for another company’s financial obligation if that company does not meet its responsibility.
- Advance Payment Guarantee – This is used to protect the advance payment made by a buyer to a seller.
- Foreign Bank Guarantee – Foreign bank guarantees are issued for the benefit of a foreign beneficiary.
- Deferred Payment Guarantee–These are used when one party in a transaction promises to make payment of a fixed amount at corresponding times in the future but is unable to do so.
Q.6. Explain what is Trade Deficit.
A trade deficit is an economic measure of international trade in which a country’s imports exceed its exports. A trade deficit represents an outflow of domestic currency to foreign markets. It is also referred to as a negative balance of trade (BOT).
Trade Deficit = Total Value of Imports – Total Value of Exports
A trade deficit typically occurs when a country fails to produce enough goods for its residents. However, in some cases, a deficit can signal that a country’s consumers are wealthy enough to purchase more goods than their country produces.
Q.7. What are the different types of LCs? What is the difference between LC and BG?
A Letter of Credit is a promise from a bank or a financial institution to fulfill the financial obligations of the buyer after the terms of the contract are met. This reduces the seller’s risk of not receiving payments post-delivery.
Bank guarantees, on the other hand, mitigate the risk of both parties involved. If any party fails to meet the contractual obligations, the other party can then invoke the bank guarantee and receive the guaranteed amount from the bank.
A letter of credit is typically used by merchants involved in import and export of goods to ensure delivery and payments. Contractors in larger infrastructure projects prefer Bank Guarantees to reduce their risks.
Bank Guarantees are more costly than Letters of Credit because they protect both parties and the transaction value is also higher.
*LCs and BGs are common products that a lot of trade finance interview questions revolve around.
Q.8. What are the trade finance products available to an exporter and to an importer?
The trade finance products available for exporters are as follows:
- Pre-Shipment Export Finance: Credit given to the seller before the shipment of products to cover the charges in procuring, producing, and packing the goods.
- Post-Shipment Export Finance: Credit extended to exporters after the shipment of goods for meeting working capital requirements.
- Bill Discounting: Trading a bill of exchange with a financial institution before it gets matured, at a price lesser than its par value.
- Factoring: A type of debtor finance in which a business sells its accounts receivable to a third party at a discount.
Trade finance products available for importers are-
- Buyers’ Credit: Short term credit available to an importer from overseas lenders such as banks for goods they are importing.
- Suppliers’ Credit: Financing system in which the supplier can give credit to the foreign importer to finance his/her purchase against a promissory note stating that the amount will be paid in full on receipt of goods.
- Letters of Credit: A letter from a bank guaranteeing the importer’s payment to the exporter for the specified amount at the specified time. In case the importer defaults, the bank covers the amount of purchase.
Q.9. What is the difference between buyer’s and supplier’s credit?
Q.10. What are the problems or difficulties in International Trade?
In international trade, merchants often face the following difficulties:
- Distance and difficulties in transportation: Long distances might make it difficult to establish quick and close trade contacts between traders. Dispatch and receipt of goods could also take a longer time.
- Risk in transit: Foreign trade involves some amount of transit risks than home trade. Insuring them could increase the cost of goods.
- Lack of information about foreign businessmen: Typically, special steps have to be taken to verify the creditworthiness of foreign businessmen. Often, credit risk could be higher if the necessary steps aren’t taken to safeguard both parties.
- Import-export restrictions and documentation: All countries charge customs duties on imports and tariff rates on exports that have to be paid. A lot of documentation is also to be filled which could involve an expenditure of time and money.
- Payment problems: Exchange rates keep on fluctuating which could cause troubles in getting the right value of the product and services.
- Investment for longer period: There time gap between the supply of goods and receipt of payment is longer in international trade. Therefore, the exporter’s capital remains locked up for a longer period.
These were common International trade finance interview questions. As is clear from the above questions, recruiters need candidates who are well-versed with the trade offerings.
You can get insights into international trade products and services from the FLIP International Trade and Cash Management Services certification course. Apart from getting an industry-recognized certification, you will also have the practical knowledge to ace such technical interviews after completing the course.